25 January 1995 Internal T.I. 9423646 - NORTHERN RESIDENTS DEDUCTION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

An area became a prescribed area (Regulation 7303(1)) as a result of a natural disaster. By virtue of this event, the area continued to qualify as a prescribed area under Regulation 7303(1)(e) (this provision is interrelated with Regulation 7303(1)(c)) even though the area ceased to qualify under Regulation 7303(1)(c) following the construction of a new road subsequent to the natural disaster. It is also noted that the area would never have qualified as a prescribed area if the natural disaster had not occurred. Is it intended that the area continue to be prescribed under Regulation 7303(1)(e)?

Position TAKEN:

While this result may not have been intended, a deduction under 110.7 cannot be claimed in respect of the area in question following the 1994 taxation year as a consequence of amendments to the northern residents deduction. Accordingly, further action is not considered warranted.

Reasons FOR POSITION TAKEN:

See position taken.

		January 26, 1995

	Client Assistance Directorate	Business and 		General
	Hélène Beauchemin	Division
	Director General	M. Eisner
(613) 957-2138
		942364

Northern Residents Deduction

This is in reply to the memorandum of September 12, 1994 submitted to us by Ms. G. Balice and Andre Cassiram concerning the above-noted subject. The enquiry involves section 110.7 of the Income Tax Act (the Act) and sections 7302 and 7303 of the Income Tax Regulations (the Regulations). It is also noted that these regulations were revoked with respect to 1993 and subsequent taxation years.

In connection with the comments set out below, we acknowledge our telephone conversation (Eisner/Barabash) on November 17, 1994 in which we obtained clarification with respect to the concern we were asked to consider.

You have set out a situation where for the first time in the 1989 taxation year, an area qualified as a "prescribed area" under Regulation 7303(1)(c) for the purposes of the northern residents deduction following a full closure of a highway. Due to a natural disaster, this highway could no longer be considered an all-weather road as defined in Regulation 7302(1). The result was that it met the conditions set out in Regulation 7303(1)(c) with respect to the 1989 taxation year. As a consequence of having met the conditions of Regulation 7303(1)(c), the area became eligible to qualify as a prescribed area under Regulation 7303(1(e) for the 1990, 1991 and 1992 taxation years as one of the conditions under Regulation 7303(1)(e) is that the area qualified under Regulation 7303(1)(c) in any preceding taxation year after 1985. Since it is our understanding that the area otherwise qualified under Regulation 7303(1)(e), it was considered to be a prescribed area for the 1990, 1991 and 1992 taxation years. With respect to this situation, your concern is whether it was intended that as long as the areas in question met the conditions of Regulation 7303(1)(c) in 1989, the effect is that the area will qualify under Regulation 7303(1)(e) in subsequent taxation years as explained below.

In connection with the above situation, certain conditions in Regulations 7303(1)(c)(iii), (iv) and Regulation 7303(1)(e) relate to your concern. Regulation 7303(1)(c)(iii) refers to the circumstances where there was no all-weather road and sets out a related requirement concerning a distance of greater than 80 kilometres. Regulation 7303(1)(c)(iv) refers to circumstances where there was an all-weather road and sets out a requirement which, amongst other things, involves a distance of greater than 160 kilometres. One of the requirements of Regulation 7303(1)(e) with respect to an area is that, as indicated above, "in any preceding taxation year after 1985, met the requirements set out in paragraph (c)". In relation to these comments, it has been mentioned that a new highway was constructed in 1991 and that the distance requirement of 160 kilometres in 7303(1)(c) is no longer satisfied. However, it is our understanding that the area in question continued to be described in Regulation 7303(1)(e) and that, in particular, a population of less than 10,000 is involved for the purposes of Regulation 7303(1)(c)(iii)(A) which refers to circumstances where an all-weather road provides access to a particular area.

At the outset, we wish to mention that you might be correct in that it would not appear to have been intended that the area in question continue to qualify as a prescribed area under Regulation 7303(1) for the purposes of section 110.7 of the Act following the construction of the new highway. This contention would seem to be supported in that the area under consideration would never have qualified as a "prescribed area" if the natural disaster had not occurred. However, as explained below, a deduction with respect to the area in question cannot be claimed under section 110.7 of the Act for 1995 and subsequent taxation years.

As a result of the recent amendments to the Act and the Regulations with respect to the northern residents deductions, Regulations 7302 and 7303 were revoked applicable to 1993 and subsequent years and Regulation 7303.1 was added applicable to 1993 and subsequent taxation years. In addition, section 110.7 of the Act was amended by subsection 82(1) of S.C. 1994, c. 7, Sched. II, applicable to 1988 and subsequent years except that for the 1988 to 1994 taxation years, the application of section 110.7 of the Act was modified pursuant to subsection 82(2) thereof. In relation to your problem, the effect of section 110.7 as it applies to the 1995 and subsequent years and Regulation 7303.1 is that deductions may only be claimed in respect of specific areas which are located within either a "prescribed intermediate zone" or a "prescribed northern zone". As it is our understanding that the area in question does not fall within such a zone, no deduction can be claimed in respect of that area under section 110.7 for 1995 and subsequent years.

As a consequence of the amendments referred to above and a telephone conversation with Current Amendments Division, further action with respect to your situation from a tax policy point of view is not considered to be warranted. As a further comment, we are mentioning that with respect to the area in question, we are not aware of any provision which would override Regulation 7303)(1)(e).

Should you require further technical assistance, we would be pleased to provide our views.

B.W. Dath
Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch